Personal Finance

Contract position with an American company: what status for CRA?

  • Last Updated:
  • Nov 11th, 2018 3:26 pm
[OP]
Newbie
Nov 7, 2018
2 posts

Contract position with an American company: what status for CRA?

I'm being offered a position by an American company. It would be full-time, in their office and they decide my shifts. They told me that since it's in Canada, they will not offer me a permanent position but a 1 year contract, renewable. They say it's because their Canada team is too small for now to have HR there (it's a startup that has just few employees in a rented office so far in Canada).
They said as a contractor, I won't have benefits, just national holidays off.
Their staff in Canada told me what they do is basically they just fill their taxes by using an extra form for contract work (T2125 I suppose, but they didn't tell me) and that they pay CRA around 20% of the gross income they receive.
The company does payment from an American account and have people in Canada sign a W8 BEN form (so they don't pay taxes in the US?)

I haven't accepted the offer yet because this all contract thing is unclear.
  • From my understanding, CRA would consider me an employee in such case, because the company would impose the schedule and provide material (laptop, desk in the office, etc). Yet the person from their Toronto office told me she doesn't get a T4 "because it's a contract".
    How do you fill as an employee with CRA without a T4?
  • Also, since it's an American company and they get a W8 BEN signed, wouldn't it be considered foreign income when filling taxes?
  • I know there is a tax treaty agreement between US and Canada that basically says taxes have to be paid to either of the two countries, so with the W8 BEN, taxes should be paid to Canada, but how?

Overall, my question is, how would I fill out my taxes later to make sure I don't get in any troubles with CRA? I need to know that to determine if the salary they offer is fair, because it does make quite a difference to pay taxes as a sole proprietor (T2125) or as an employee/foreign income.
Please, do correct me on whatever I'm getting wrong.
5 replies
Member
May 16, 2017
334 posts
357 upvotes
They are trying to treat you as an independent contractor, when you probably really aren't; and trying to avoid their paperwork requirements and setting-up properly as an employer in Canada. Not necessarily a big to-do for a short-term. Some reference articles:

https://turbotax.intuit.ca/tips/canadia ... anies-6221
https://www.canada.ca/en/revenue-agency ... oyers.html
https://canadianpayrollservices.com/leg ... %EF%BB%BF/
Deal Addict
Jan 30, 2012
1397 posts
616 upvotes
TORONTO
I suspect both you and this company are cruising for a bruising from CRA.

The fact that this company is from the USA doesn't change employment law in Canada. This company should probably talk to an Canadian lawyer who can explain tax & employment law in Canada.

Contractor doesn't mean anything. You are either an employee (including an employee on a contract that ends in 1 year) or you are self-employed.

Self-employed means you are running a bona fide business. If you are running a bona fide business, then like any business you get the usual range of tax deductions available to a business (which is much more than what an employee can deduct).

Many people and their employees pretend that they are not in an employee/employer relationship but in a business-to-business relationship. They do this for tax benefits and to avoid the overhead/costs of having employees.

Sometimes CRA will notice, audit both parties and say this is not a business-to-business relationship but an employee/employer relationship and reassess you and the employer for taxes and fines.

Now, what should you do?

Many people and their employers quietly pretend that they are running a real business and hope that CRA doesn't notice.

Of course, pointing out to the US company that they are probably breaking tax laws in Canada might not go over well with this company. Some people would just quietly do what the company says and only bring it up if the company tries to screw them over.

You might want to discuss with an accountant or tax lawyer.
Member
User avatar
Dec 24, 2007
377 posts
266 upvotes
BC
Knubbig wrote:
Nov 9th, 2018 12:20 am
  • From my understanding, CRA would consider me an employee in such case, because the company would impose the schedule and provide material (laptop, desk in the office, etc). Yet the person from their Toronto office told me she doesn't get a T4 "because it's a contract".
    How do you fill as an employee with CRA without a T4?
  • Also, since it's an American company and they get a W8 BEN signed, wouldn't it be considered foreign income when filling taxes?
  • I know there is a tax treaty agreement between US and Canada that basically says taxes have to be paid to either of the two countries, so with the W8 BEN, taxes should be paid to Canada, but how?
#1. From facts you have given you most likely are a "contract employee" and not a independent contractor. See factors considered by CRA Employee or Self-employed to determine what you should be classified as. The company is trying to duck out of paying the employer's share of EI (equals 1.4X the employee amount) and CPP (equals the employee amount) and any Worker Compensation premiums in case of injury on the job, which you would be responsible for if self-employed.
#2. At tax time they will probably issue a T4A as they want to treat you as a contractor since they didn't claim any source deductions. You can request that as an employer they should issue T4 instead. They will refuse on the grounds that you are a contractor, keep your correspondence, and file your income on the line "Other employment income". You will owe the government the EI and CPP contributions and tax installments that wasn't claimed on your pay cheque. To be safe, file for a ruling from the CRA regarding your situation before tax time Request CRA Ruling
#3. A W8 Ben form is signed by a Canadian resident to notify the U.S. company that the tax treaty applies to their situation for US tax purpose otherwise they must withhold 30% of any payment of an amount subject to withholding made to a payee that is a foreign person
#4. That is what the W8 form is for so no US taxes will be deducted. You report it as employment income.
[OP]
Newbie
Nov 7, 2018
2 posts
Thank you all for the answers!
M8Rxmjsik wrote:
Nov 9th, 2018 1:28 pm
Sometimes CRA will notice, audit both parties and say this is not a business-to-business relationship but an employee/employer relationship and reassess you and the employer for taxes and fines.
That's precisely what I want to avoid. I know from the start that if I accept this offer, no matter what the mployer says I will be an employee for CRA and that they should issue me a T4 and pay their taxes to Canada. But I also know that they won't issue a T4 nor pay their taxes so my question is about how do I fill my taxes so that if there is a CRA audit, the employer is the only one fined because I did my part?
WetCoastGuy wrote:
Nov 9th, 2018 1:40 pm
#2. At tax time they will probably issue a T4A
I know for sure that they don't issue any T4 nor T4A to their Canadian employees. Then should I ask for a T4 at tax time and record their answer where they will say I'm a contractor?
WetCoastGuy wrote:
Nov 9th, 2018 1:40 pm
[...] file your income on the line "Other employment income". You will owe the government the EI and CPP contributions and tax installments that wasn't claimed on your pay cheque.
This line is on the T1, right? With that I will pay my part of the EI and CPP contibutions that wasn't deducted from my pay cheques, correct? So the employer's part will remain unpaid?
WetCoastGuy wrote:
Nov 9th, 2018 1:40 pm
To be safe, file for a ruling from the CRA regarding your situation before tax time Request CRA Ruling
I'm already 99% sure that I would be an employee and not a contractor in CRA's eyes. If I request a ruling, will the employer know about it? Do I have to ask or warn the employer that I am requesting the ruling? When CRA rules that I am indeed an employee, then what? Will the employer receive a notice directly from CRA?


Also, what would happen if I fill as a self-employed with a T2125, pay EI and CPP contributions for both employer and employee parts and I'm later audited by CRA? Can I be fined while having overpaid taxes?
Member
User avatar
Dec 24, 2007
377 posts
266 upvotes
BC
If you already have letters, emails, etc from the company detailing your contract and their position on this, no need to request T4 from employer as they already decided that they will not be treating you as an employee. I would just confirm as many details of your employment contract with them...basically get answers to the questions regarding: degree of control over your work, provision of equipment and use of assets, whether work to be done personally and cannot use assistants, no financial liability arising from any work done for company. Keep all the correspondence so you have support for the CRA in case they challenge it.

On the T1 tax return, other employment income is Line 104. You will only be assessed the employee portion of EI and CPP not paid. If the employment amount is substantial the return might be flagged for an audit as this is where normally "tips, gratuities, and occasional earnings" would go.

If you request a CRA Ruling, they will contact the company for their reasoning on the issue. If they rule that you are an employee they will advise both parties. Any amounts due will be recovered from you and the company. The company will probably be pissed off with you for rocking the boat and not renew your contract

If you file as self-employed you will pay the extra CPP and EI costs and CRA wouldn't care if you overpaid. After an audit you would get back the amounts overpaid if your income is reclassified as "employment income". However, if you don't get audited it is money and interest that comes out of your pocket for the company "cheating" on their obligation. You can always anonymously tip the CRA and force a payroll audit so the company would be required to treat you all as "employees" and to correctly issue T4s.

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